The Benefits Of Incorporating Your Real Estate Investing Business
Therefore, before you make any decisions in regards to the type of corporation that
you are going to form, I highly recommend that you speak to a tax professional in the form of a tax attorney and/or a tax accountant. This way your personal circumstances can be factored into the decision and you will select the best option for your circumstances. What we will provide here in this article is general benefits, only a professional can advise you as to the specific benefits that you will receive.
One of the primary benefits that a corporation provides to an investor is liability protection. Corporations became popular back in the 1400's and 1500s in Europe. Wealthy business owners would commission voyages on sailboats across the ocean to discover new trade routes. If anything was to happen to the ship under the corporation, the losses were limited only to the ship. Family members of the sailors on that ship could not turn around and sue the business owner.
Corporations today offer a similar benefit to real estate investors. As an investor of a property, there is the potential to create a great deal of liability if he or she is not properly protected. For example, if a person is injured on the property, the injured party can turn around and sue the property owner for damages.
Now you might argue "well don't I have insurance to protect me from that?" It all depends on how much coverage is provided for in your policy. The amount of coverage varies based on what you purchased when you brought insurance for the property.
Depending on the nature of the injuries, the lawsuit could potentially be for an amount greater than the amount of insurance covered on the property. If that is the case and you lose the lawsuit, the plaintiff can come after the building owner for the difference between the insurance amount and the total verdict.
Here is the danger of being a victim to a lawsuit that exceeds the insurance amount. As a real estate investor, it is likely that you have assets above and beyond the property that you own. You might own other investment properties, other types of assets such as stock, bonds, mutual funds, commodities and so on. All of these assets are at risk of being lost to recover the damages from a lawsuit if you own an investment property under your own name.
When the property is owned by a corporation that you set up, this gives you the ability to control the property while limiting the risks to the corporation itself. If you have 5 properties owned by a single corporation, a plaintiff of a lawsuit can only go after the properties owned by the corporation. Any assets owned by you or owned by other corporations that you control, a plaintiff cannot go after. Many investors set up separate corporations for each and every property that they own. This way liability is limited to just that one property, not all of the other properties that are a part of their portfolio.
Owning your investment properties under a corporation also protects you from liability that you might incur personally. For example, suppose you do real estate investing on a part time basis and you lose your job. Bills begin to pile up and creditors decide to go after you. They will most certainly be able to make claims on your personal assets such as the money in your personal bank account. However, they would not be able to go after any assets owned by a corporation that you own.
If you want to take your liability protection up and additional level, you can employ a strategy of a master protection trust with a corporation. The master protection trust owns the corporation. The corporation owns a land trust. You then have a separate land trust for each property that you own. This is a more advanced liability protection strategy that we can talk about in a future issue.
The second major benefit that running your real estate investing business under a corporation offers is tax benefits. Owning property under a corporation often results in the income that this property generates being taxed at a much lower rate than it would be if you owned the property in your personal name. This becomes even more important as your income increases.
For example, if you run your real estate business as a sole proprietorship, which is what you are doing if you are not investing under some form of corporation, there are a number of tax benefits that you are missing out on. A perfect example of this is federal payroll taxes.
Let's say your real estate investing business generated $100,000 in profit, after expenses are accounted for. Not running under a corporation will result in a self employment tax of 15.3%. This tax is how the IRS gets its money from business owners similar to what they would collect from a wage earning employee to cover social security and Medicare costs.
Certain types of corporations (An S Corp and some LLCs) can designate their income as a dividend disbursement. Dividends are taxed at only 15% currently and depending on your tax bracket it can be as low as 0%. These taxes are scheduled to expire in 2011, but it's certainly possible that political factors could cause politicians to extend them, at least for those individuals that make less than $250,000, which is the threshold President Obama has stated in which he would not raise taxes for. You do have to pay yourself a "reasonable" salary and that salary is subjected to traditional income taxes. However that salary could be low, especially if you are a part time investor.
As you can see, there are numerous benefits for running your real estate investing business under a corporate structure. Keep in mind that every tax situation is different so it is important that you speak with a qualified tax professional for specific advice on your particular situation.
The Benefits Of Incorporating Your Real Estate Investing Business
By: Mike Warren
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